chapter 02 supply and demand · mcgraw-hill education

2-1

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 02

Supply and Demand

Multiple Choice Questions

1. Which is not true of market equilibrium?

A. All sellers who want to sell at the equilibrium price can find a buyer to sell to.

B. It is the most desirable outcome that a social order could have.

C. All buyers who want to buy at the equilibrium price can find a seller to buy from.

D. Circumstances can change from day to day which make any equilibrium very tentative.

2. The law of demand states that

A. scarcity can never be solved.

B. when the price of a product falls, people buy more of it.

C. supply creates its own demand.

D. prices will continue to rise as long as the population grows.

2-2


3. The real price of a product is its

A. absolute level on any given day.

B. absolute level on any given day divided by the relevant price index.

C. absolute level on any given day minus any external costs of the production of the good.

D. price relative to the price of other goods and services.

4. The equilibrium price is the price

A. from which there is always a tendency to move away.

B. at which quantity supplied equals quantity demanded.

C. where there are surpluses and shortages.

D. suppliers agree to charge.

2-3


5. Please refer to the following diagram.

In the diagram if the supply curve is S, the equilibrium price is:

A. 4

B. 3

C. 2

D. 0

2-4



If the supply curve is S, at a price of $4 there will be a

A. surplus of 1.

B. surplus of 2.

C. shortage of 1.

D. shortage of 2.

2-5



A horizontal interpretation of the demand curve for a product

A. stipulates price as the independent variable in the price quantity relationship.

B. tells what prices would be required to sell various quantities of output.

C. indicates that a seller can sell all he/she wants to sell at the given price.

D. indicates that a buyer can buy all she/he wants to buy at a given price.

2-6


8. Please refer to the following diagram


A. surplus of 1.

B. surplus of 2.

C. shortage of 1.

D. shortage of 2.

9. If the government decides to set the price of widgets below the equilibrium price

A. most economists would argue that one could reallocate resources and improve total welfare in

the system.

B. people who buy the widgets are now worse off.

C. producers of widgets are now better off.

D. the market quantity of widgets will increase.

2-7


10. If an airline overbooks it pays people who volunteer to leave the overbooked flight. This system is

better than drawing randomly from a hat the people who should miss the flight because

A. those with the least to lose are the ones who miss the flight.

B. it gives everyone a chance to get money they hadn't counted on.

C. it is quicker and helps keep the flight on schedule.

D. it is the most equitable way of solving the situation.

11. My income rose and the price of good Y rose also. That means that my demand curve for good X

shifted right.

A. This statement is always true.

B. This statement will always be true if good Y is a substitute for good X.

C. This statement will always be true if good X is a normal good.

D. This statement will always be true if good Y is a substitute for X and X is a normal good.

12. Most economists are against rent control because it

A. leads to surpluses.

B. encourages landlords to build too many apartments.

C. discourages the building of new apartments.

D. discourages tenants from searching for apartments.

2-8


13. Which of the following statements would most economists agree with?

A. Rent controls hurt everyone.

B. Rent controls hurt poor people and help the rich.

C. Rent controls decrease overall societal welfare.

D. Rent control allow for a more equitable distribution of resources.

14. If income rises

A. the demand curve will shift right.

B. the demand curve will shift left.

C. the demand curve will stay the same since only price effects it.

D. one cannot tell which way demand shifts with the information given.

15. If the Surgeon General announces that colas cause cancer then we would expect

A. the demand for cola will shift right.

B. the demand for cola will shift left.

C. the demand for cola will stay the same.

D. one cannot tell.

16. A war in the Middle East causes the price of oil to rise. What would we expect to happen to the

demand for automobile tires?

A. The demand for automobile tires will shift right.

B. The demand for automobile tires will shift left.

C. The demand for automobile tires will stay the same.

D. One cannot tell what will happen with the information given.

2-9


17. If the State of California decides to raise the drinking age to 25, what would happen to the

demand for beer?

A. The demand for beer will shift right.

B. The demand for beer will shift left.

C. The demand for beer will stay the same, but people will move up the demand curve consuming

less.


18. A new technology is announced which allows manufacturers to produce widgets for less. Widgets

are a key input in the production of whatchamacallits. What would we expect to happen to the

market for whatchamacallits?

A. The demand curve would shift left.

B. The supply curve would shift left.

C. The demand curve would shift right.

D. The supply curve would shift right.

19. A hailstorm kills all of the wheat in Minnesota. What will happen to the price and quantity of wheat

sold in the U.S.?

A. Equilibrium price falls, equilibrium quantity increases.

B. Equilibrium price rises, equilibrium quantity falls.

C. Equilibrium price falls, equilibrium quantity falls.

D. Equilibrium price rises, equilibrium quantity rises.

2-10


20. The price of peanut butter rises due to a blight on the peanut crop; peanut butter and jelly are

complements. What happens to the equilibrium quantity and price of jelly?





21. If the number of suppliers in the microcomputer industry increases, what would we expect to

happen?

A. The number of microcomputers sold will fall.

B. The price of microcomputers will rise.

C. The supply curve will shift left.

D. Movement along the demand curve will occur.

22. A new discovery makes ink jet computer printers less expensive to produce. At the same time

another type of computer printer, the laser printer, also becomes less expensive. What would you

expect to happen to the equilibrium price and quantity of ink jet printers?

A. Equilibrium price will rise, but the effect on quantity is uncertain.

B. Equilibrium price will fall, but the effect on quantity is uncertain.

C. Equilibrium quantity will rise, but the effect on price is uncertain.

D. The answer cannot be determined from the information given above.

2-11


23. Two factors are affecting the domestic auto industry: (1) an increase in cheap Korean imports (2) an

increase in the cost of materials. What can we say about equilibrium price and quantity of

domestic autos?

A. Equilibrium price will rise.

B. Equilibrium price will fall.

C. Equilibrium quantity will fall.


24. The price in the market has fallen and so has the quantity. This could be happening because

A. technology is rapidly advancing.

B. factor prices are falling.

C. income has fallen for a normal good.

D. factor prices are rising.

25. A long hot summer has increased the demand for beer; at the same time a tax is placed on

alcohol. What can we say about the equilibrium price and quantity of alcohol?

A. Equilibrium price rises; equilibrium quantity falls.

B. Equilibrium price rises; equilibrium quantity rises.

C. Equilibrium price rises; equilibrium quantity is unknown.

D. Equilibrium price falls; equilibrium quantity is unknown.

2-12


26. Pizza and beer are complements. The price of beer increases. What happens to the market for

pizza?


B. Equilibrium price falls; equilibrium quantity falls.

C. Equilibrium price rises; equilibrium quantity rises.

D. Equilibrium price falls; equilibrium quantity rises.

27. Let demand be given by P = 10 - Q; let supply be given by P = Q. What is the equilibrium price?

A. 10

B. 5

C. 2

D. 0

28. Let demand be given by P = 10 - Q; let supply be given by P = Q. What is the equilibrium

quantity?

A. 10

B. 5

C. 2

D. 4

2-13


29. If a good is inferior, then an increase in income will cause the demand curve to

A. shift right.

B. shift left.

C. stay the same.

D. rotate inward.

30. If price and quantity are not at their equilibrium positions, then

A. it is possible to reallocate so that some people are better off without harming others.

B. a move to another position will not hurt anyone.

C. a move to another position will help everyone.

D. government must intervene.

31. In a market economy price serves to

A. allocate goods.

B. distribute resources more fairly.

C. increase sellers profits.

D. value goods in dollar terms.

32. If there is a technological advance that lowers the cost of producing x-ray machines, then we can

say that the

A. quantity demanded for those machines will increase.

B. demand for those machines will shift right.

C. quantity supplied of those machines will go up.

D. quantity supplied of those machines will decrease.

2-14


33. A price support system that raises price above the normal equilibrium will cause a

A. decrease in the quantity demanded.

B. shift right in supply.

C. shift left in demand.

D. decrease in the quantity supplied.

34. Let demand be given by P = 20 - 3Q and supply by P = 5 + 2Q. Equilibrium quantity will be:

A. 5

B. 3

C. 11

D. 10

35. A good that is not scarce

A. would have a vertical supply curve over the relevant range.

B. would have a zero price.

C. is not in demand.

D. would have an infinite price.

36. Which of the following represents a change in the quantity demanded?

A. People buy more computers as prices fall.

B. People buy more computers because of a surge in the economy.

C. People buy more computers due to a change in tastes.

D. People buy more computers due to a change in income.

2-15


37. Which statement is true?

A. You can have a shortage without scarcity.

B. You can have scarcity without a shortage.

C. The terms "shortage" and "scarcity" are identical concepts in economics.

D. No scarcity will exist at a market equilibrium price.

38. If a price above equilibrium is imposed on a market, welfare will increase when the price control is

lifted. If a price control is below equilibrium and then is repealed and allowed to rise to

equilibrium, welfare in the system will increase.

A. The first statement is true and the second is false.

B. The first statement is false and the second statement is true.

C. Both statements are false.

D. Both statements are true.

39. If the current price of pizzas is above the equilibrium price of pizzas then

A. sellers of pizzas have an incentive to increase the price.

B. sellers of pizzas have an incentive to decrease the price.

C. buyers of pizzas have an incentive to buy more.

D. buyers of pizzas have an incentive to buy less.

2-16


40. If the price of roses increases the

A. demand curve for carnations will shift to the right.

B. demand curve for carnations will shift to the left.

C. demand curve for roses will shift to the right.

D. demand curve for roses will shift to the left.

41. According to the model of supply and demand, an increase in the price of milk will cause a

A. leftward shift in the supply for cheese.

B. rightward shift in the supply for cheese.

C. leftward shift in the supply for milk.

D. rightward shift in the demand for cheese.

42. Suppose the football team at your university wins 10 games in a row. The following will be a

possible outcome of this event in the market for football tickets:

A. The equilibrium price and the equilibrium quantity will increase

B. The equilibrium price and the equilibrium quantity will decrease

C. The equilibrium price will increase and the equilibrium quantity will decrease

D. The equilibrium price will decrease and the equilibrium quantity will increase

2-17


43. Let supply be given by Q = -7.5 + 0.5P and demand by Q = 10 - 0.2P. What will be the equilibrium

price in this market?

A. 25

B. 5

C. 10

D. 20

44. Say the price of MP3 songs increases. Other things equal the:

A. demand for MP3 songs will decrease.

B. quantity demanded for MP3 songs will decreases.

C. supply for MP3 songs will increase.

D. quantity supply for MP3 songs will decrease.

45. Say at the current price there is an excess supply in the market for bicycles. In the future the price

for bicycles will:

A. increase.

B. decrease.

C. stay the same.

D. increase or decrease; but really can't tell.

2-18


46. Say the market for cereal is initially in equilibrium when all the major newspaper published the

findings from study that say that eating 2 cups of cereal each day significantly reduces the risk for

a heart attack. Other things equal, the publication of these findings will:

A. decrease the market quantity of cereal.

B. decrease the market price of cereal.

C. increase the supply of cereal.

D. increase the quantity supplied of cereal.

47. Suppose the government imposed a binding price ceiling in the market for housing. Other things

equal, the effect of this price ceiling will be to:

A. decrease the quantity of houses for sale in the market.

B. give an incentive for buyers and sellers to of houses to make illegal transactions.

C. allow fewer low-income people to buy water.

D. all of the choices are correct.

48. Suppose the demand for cigarettes was P = 100 - 5Q, and the supply for cigarettes was P = 5Q.

The market equilibrium price in this market would be:

A. $10

B. $20

C. $100

D. $5

2-19


49. If climate change were to reduce the output per acre of wheat but not the output of other crops,

what effect this would have on the soybean market?

A. The demand for soybeans would shift right and the price and quantity would rise.

B. The quantity demanded of soybeans will rise and price will increase.

C. The supply of soybeans will shift left and price will rise.

D. The quantity demanded will increase and the demand will shift right.

50. Estate sales often involve an auctioneer rattling off prices in an effort to get the highest price

possible. Which of the following is true?

A. Because there is no chance to have the quantity supply increased in the moment the sale

cannot reach the efficient point.

B. The sale does reach equilibrium because the only person desiring the item at the last price

called gets it so no other trades could add to welfare.

C. If the auctioneer starts the bid too low and only one person wants the item, then efficiency is

not reached.

D. Equilibrium properties are not relevant unless a larger market is involved.

51. A tax of 10 units on the seller can be shown graphically as a

A. leftward shift of demand.

B. leftward shift of supply.

C. rightward shift of supply.

D. rightward shift of demand.

2-20


52. If a 20 unit tax is placed on a seller, then

A. the seller will bear all of the tax burden.

B. the buyer will bear all of the tax burden.

C. both parties will share the tax burden equally.

D. the distribution of the tax burden cannot be determined from the information given.

53. If the government wishes to raise revenue by taxing cigarettes, it

A. makes no difference whether the consumer or the producer actually transfers the money to the

government since the market effects are the same.

B. is best to have the consumers pay the tax since they view cigarettes as necessities.

C. is best to tax the producer since they will not cut production just because of the tax.

D. is foolish since a sales tax increase leads to less tax revenue in an industry like tobacco.

54. Let supply be given by P = 5Q and demand by P = 19 - 2Q. Suppose we now place a tax of 5 per

unit of output on the seller. The new supply curve is:

A. P = 5Q

B. P = 5 + 5Q

C. P = 5Q - 5

D. P = 5Qt5

2-21



unit of output on the seller. The new equilibrium quantity is:

A. 7

B. 2

C. 3

D. 5


unit of output on the seller. The new equilibrium price is:

A. 2

B. 7

C. 15

D. 10

57. As the supply curve becomes steeper, the proportion of a sales tax paid by the seller

A. increases.

B. decreases.

C. stays the same.

D. gets closer to zero.

2-22


58. As the demand curve becomes steeper, the proportion of a sales tax paid by the seller

A. increases.

B. decreases.

C. stays the same.


59. Suppose that the supply curve for a good is vertical. In this case we would expect

A. nothing to be sold so no tax is collected.

B. a tax placed on the buyer to be borne entirely by the seller.

C. a tax placed on the buyer to be borne entirely by the buyer.

D. the tax to be shared equally by both buyer and seller.

60. Which is true?

A. A per unit tax levied on the producer in an industry with a horizontal supply curve will be all

paid by the producer.

B. A per unit tax levied in an industry with a horizontal demand curve will be all paid by the

producer.

C. A producer never pays all of a per unit tax no matter what the market conditions.

D. A seller never pays all of a per unit tax no matter what the market conditions.

2-23


61. Let supply be given by Q = -7.5 + 0.5P and demand by Q = 10 - 0.2P. Suppose we now place a tax

of $7 per unit of output on the seller. The new equilibrium price will be:

A. 4

B. 30

C. 37

D. 10

Essay Questions

62. Explain why an equilibrium point in a free market is considered to be the socially efficient point.

Sketch graph a situation where a government price ceiling below equilibrium leads to inefficiency.

Explain in words why the inefficiency exists and shade in on your graph the lost benefit that creates

the inefficiency.

2-24


63. If the demand curve of a market is P = 14 - Q and the supply curve is P = 2 + 2Q, what is the

surplus created if a price support of 12 is imposed in the market?

64. If the demand curve of a market is P = 14 - Q and the supply curve is P = 2 + 2Q, but a price

ceiling of 6 is imposed, what will the shortage be?

65. Your text shows how price supports or ceilings lead to a loss of welfare. What impact on welfare

would a quota or quantity restriction have on welfare?

2-25


66. Suppose the market for Mexican food in your neighborhood was in equilibrium.

a. Draw a diagram showing the demand and supply curve for Mexican food. Indicate the market

equilibrium quantity and price in this market.

b. Suppose the government imposed a binding price ceiling in this market, with the goal of making

Mexican food affordable to most residents. Add the price ceiling to your diagram, and then

identify the quantity demanded and quantity supply in this market with the price ceiling.

c. Would the government be able to make Mexican food affordable to most people with the price

ceiling? Explain your answer using the diagram you drew in part (b).

67. What is the equilibrium quantity of a market with a demand curve P = 10 - Q and a supply curve

equal to P = 2 + 2Q and a tax imposed on the seller of $2 per unit? How does this tax effect

resource allocation? What might justify the allocation effect of the tax?

2-26


Chapter 02 Supply and Demand Answer Key

Multiple Choice Questions

1. Which is not true of market equilibrium?

A. All sellers who want to sell at the equilibrium price can find a buyer to sell to.

B. It is the most desirable outcome that a social order could have.

C. All buyers who want to buy at the equilibrium price can find a seller to buy from.

D. Circumstances can change from day to day which make any equilibrium very tentative.

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 02-02 Explain why the equilibrium in a market identifies a price-quantity pair for which buyers and sellers are

satisfied.

Topic: Equilibrium Quantity and Price

2. The law of demand states that

A. scarcity can never be solved.

B. when the price of a product falls, people buy more of it.

C. supply creates its own demand.

D. prices will continue to rise as long as the population grows.



Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 02-01 Explain how the demand and supply curves summarize the behavior of buyers and sellers.

2-27


Topic: Supply and Demand Curves

3. The real price of a product is its

A. absolute level on any given day.

B. absolute level on any given day divided by the relevant price index.

C. absolute level on any given day minus any external costs of the production of the good.

D. price relative to the price of other goods and services.



Blooms: Remember

Difficulty: 1 Easy



4. The equilibrium price is the price

A. from which there is always a tendency to move away.

B. at which quantity supplied equals quantity demanded.

C. where there are surpluses and shortages.

D. suppliers agree to charge.



Blooms: Remember

Difficulty: 1 Easy



2-28



In the diagram if the supply curve is S, the equilibrium price is:

A. 4

B. 3

C. 2

D. 0


Blooms: Remember

Difficulty: 1 Easy


satisfied.


2-29




A. surplus of 1.

B. surplus of 2.

C. shortage of 1.

D. shortage of 2.


Blooms: Understand


Learning Objective: 02-03 Explain how shifts in supply and demand curves cause equilibrium prices and quantities to change.

Topic: Adjustment to Equilibrium

2-30



A horizontal interpretation of the demand curve for a product

A. stipulates price as the independent variable in the price quantity relationship.

B. tells what prices would be required to sell various quantities of output.

C. indicates that a seller can sell all he/she wants to sell at the given price.

D. indicates that a buyer can buy all she/he wants to buy at a given price.


Blooms: Understand




2-31


8. Please refer to the following diagram


A. surplus of 1.

B. surplus of 2.

C. shortage of 1.

D. shortage of 2.


Blooms: Understand




2-32


9. If the government decides to set the price of widgets below the equilibrium price

A. most economists would argue that one could reallocate resources and improve total welfare

in the system.

B. people who buy the widgets are now worse off.

C. producers of widgets are now better off.

D. the market quantity of widgets will increase.



Blooms: Understand


Learning Objective: 02-04 Explain why transactions can always be found that make some parties better off without harming

others whenever a market is not in equilibrium.

Topic: Some Welfare Properties of Equilibrium

10. If an airline overbooks it pays people who volunteer to leave the overbooked flight. This system

is better than drawing randomly from a hat the people who should miss the flight because

A. those with the least to lose are the ones who miss the flight.

B. it gives everyone a chance to get money they hadn't counted on.

C. it is quicker and helps keep the flight on schedule.

D. it is the most equitable way of solving the situation.

AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard




2-33


11. My income rose and the price of good Y rose also. That means that my demand curve for good

X shifted right.

A. This statement is always true.

B. This statement will always be true if good Y is a substitute for good X.

C. This statement will always be true if good X is a normal good.

D. This statement will always be true if good Y is a substitute for X and X is a normal good.



Blooms: Understand




12. Most economists are against rent control because it

A. leads to surpluses.

B. encourages landlords to build too many apartments.

C. discourages the building of new apartments.

D. discourages tenants from searching for apartments.



Blooms: Understand


Learning Objective: 02-05 Explain why attempts to peg prices below or above their equilibrium levels produces negative side-

effects and describe both the rationing and allocative functions of prices.

Topic: Free Markets and the Poor

2-34


13. Which of the following statements would most economists agree with?

A. Rent controls hurt everyone.

B. Rent controls hurt poor people and help the rich.

C. Rent controls decrease overall societal welfare.

D. Rent control allow for a more equitable distribution of resources.

AACSB: Analytic


Blooms: Evaluate

Difficulty: 3 Hard




14. If income rises

A. the demand curve will shift right.

B. the demand curve will shift left.

C. the demand curve will stay the same since only price effects it.

D. one cannot tell which way demand shifts with the information given.



Blooms: Understand


Learning Objective: 02-06 List some determinants of supply and demand.

Topic: Determinants of Supply and Demand

2-35


15. If the Surgeon General announces that colas cause cancer then we would expect

A. the demand for cola will shift right.

B. the demand for cola will shift left.

C. the demand for cola will stay the same.

D. one cannot tell.



Blooms: Understand




16. A war in the Middle East causes the price of oil to rise. What would we expect to happen to the

demand for automobile tires?

A. The demand for automobile tires will shift right.

B. The demand for automobile tires will shift left.

C. The demand for automobile tires will stay the same.




Blooms: Understand




2-36


17. If the State of California decides to raise the drinking age to 25, what would happen to the

demand for beer?

A. The demand for beer will shift right.

B. The demand for beer will shift left.

C. The demand for beer will stay the same, but people will move up the demand curve

consuming less.




Blooms: Understand




18. A new technology is announced which allows manufacturers to produce widgets for less.

Widgets are a key input in the production of whatchamacallits. What would we expect to

happen to the market for whatchamacallits?

A. The demand curve would shift left.

B. The supply curve would shift left.

C. The demand curve would shift right.

D. The supply curve would shift right.



Blooms: Understand




2-37


19. A hailstorm kills all of the wheat in Minnesota. What will happen to the price and quantity of

wheat sold in the U.S.?







Blooms: Understand




20. The price of peanut butter rises due to a blight on the peanut crop; peanut butter and jelly are

complements. What happens to the equilibrium quantity and price of jelly?





AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard



2-38


21. If the number of suppliers in the microcomputer industry increases, what would we expect to

happen?

A. The number of microcomputers sold will fall.

B. The price of microcomputers will rise.

C. The supply curve will shift left.

D. Movement along the demand curve will occur.

AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard



22. A new discovery makes ink jet computer printers less expensive to produce. At the same time

another type of computer printer, the laser printer, also becomes less expensive. What would

you expect to happen to the equilibrium price and quantity of ink jet printers?

A. Equilibrium price will rise, but the effect on quantity is uncertain.

B. Equilibrium price will fall, but the effect on quantity is uncertain.

C. Equilibrium quantity will rise, but the effect on price is uncertain.


AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard



2-39


23. Two factors are affecting the domestic auto industry: (1) an increase in cheap Korean imports (2)

an increase in the cost of materials. What can we say about equilibrium price and quantity of

domestic autos?

A. Equilibrium price will rise.

B. Equilibrium price will fall.

C. Equilibrium quantity will fall.


AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard



24. The price in the market has fallen and so has the quantity. This could be happening because

A. technology is rapidly advancing.

B. factor prices are falling.

C. income has fallen for a normal good.

D. factor prices are rising.

AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard



2-40


25. A long hot summer has increased the demand for beer; at the same time a tax is placed on

alcohol. What can we say about the equilibrium price and quantity of alcohol?


B. Equilibrium price rises; equilibrium quantity rises.

C. Equilibrium price rises; equilibrium quantity is unknown.

D. Equilibrium price falls; equilibrium quantity is unknown.

AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard



26. Pizza and beer are complements. The price of beer increases. What happens to the market for

pizza?


B. Equilibrium price falls; equilibrium quantity falls.

C. Equilibrium price rises; equilibrium quantity rises.

D. Equilibrium price falls; equilibrium quantity rises.



Blooms: Understand




2-41



price?

A. 10

B. 5

C. 2

D. 0



Blooms: Understand


Learning Objective: 02-07 Solve for equilibrium prices and quantities when supply and demand curves are expressed in algebraic

form.

Topic: The Algebra of Supply and Demand


quantity?

A. 10

B. 5

C. 2

D. 4



Blooms: Understand



form.


2-42


29. If a good is inferior, then an increase in income will cause the demand curve to

A. shift right.

B. shift left.

C. stay the same.

D. rotate inward.



Blooms: Remember

Difficulty: 1 Easy



30. If price and quantity are not at their equilibrium positions, then

A. it is possible to reallocate so that some people are better off without harming others.

B. a move to another position will not hurt anyone.

C. a move to another position will help everyone.

D. government must intervene.



Blooms: Understand



satisfied.


2-43


31. In a market economy price serves to

A. allocate goods.

B. distribute resources more fairly.

C. increase sellers profits.

D. value goods in dollar terms.



Blooms: Understand





32. If there is a technological advance that lowers the cost of producing x-ray machines, then we

can say that the

A. quantity demanded for those machines will increase.

B. demand for those machines will shift right.

C. quantity supplied of those machines will go up.

D. quantity supplied of those machines will decrease.

AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard



2-44


33. A price support system that raises price above the normal equilibrium will cause a

A. decrease in the quantity demanded.

B. shift right in supply.

C. shift left in demand.

D. decrease in the quantity supplied.

AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard




34. Let demand be given by P = 20 - 3Q and supply by P = 5 + 2Q. Equilibrium quantity will be:

A. 5

B. 3

C. 11

D. 10



Blooms: Understand



form.


2-45


35. A good that is not scarce

A. would have a vertical supply curve over the relevant range.

B. would have a zero price.

C. is not in demand.

D. would have an infinite price.



Blooms: Understand



satisfied.


36. Which of the following represents a change in the quantity demanded?

A. People buy more computers as prices fall.

B. People buy more computers because of a surge in the economy.

C. People buy more computers due to a change in tastes.

D. People buy more computers due to a change in income.



Blooms: Understand




2-46


37. Which statement is true?

A. You can have a shortage without scarcity.

B. You can have scarcity without a shortage.

C. The terms "shortage" and "scarcity" are identical concepts in economics.

D. No scarcity will exist at a market equilibrium price.



Blooms: Understand



satisfied.


38. If a price above equilibrium is imposed on a market, welfare will increase when the price control

is lifted. If a price control is below equilibrium and then is repealed and allowed to rise to

equilibrium, welfare in the system will increase.

A. The first statement is true and the second is false.

B. The first statement is false and the second statement is true.

C. Both statements are false.

D. Both statements are true.



Blooms: Understand





2-47


39. If the current price of pizzas is above the equilibrium price of pizzas then

A. sellers of pizzas have an incentive to increase the price.

B. sellers of pizzas have an incentive to decrease the price.

C. buyers of pizzas have an incentive to buy more.

D. buyers of pizzas have an incentive to buy less.



Blooms: Understand




40. If the price of roses increases the

A. demand curve for carnations will shift to the right.

B. demand curve for carnations will shift to the left.

C. demand curve for roses will shift to the right.

D. demand curve for roses will shift to the left.



Blooms: Understand




2-48


41. According to the model of supply and demand, an increase in the price of milk will cause a

A. leftward shift in the supply for cheese.

B. rightward shift in the supply for cheese.

C. leftward shift in the supply for milk.

D. rightward shift in the demand for cheese.



Blooms: Understand




42. Suppose the football team at your university wins 10 games in a row. The following will be a

possible outcome of this event in the market for football tickets:

A. The equilibrium price and the equilibrium quantity will increase

B. The equilibrium price and the equilibrium quantity will decrease

C. The equilibrium price will increase and the equilibrium quantity will decrease

D. The equilibrium price will decrease and the equilibrium quantity will increase

AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard


satisfied.


2-49


43. Let supply be given by Q = -7.5 + 0.5P and demand by Q = 10 - 0.2P. What will be the

equilibrium price in this market?

A. 25

B. 5

C. 10

D. 20



Blooms: Understand



form.


44. Say the price of MP3 songs increases. Other things equal the:

A. demand for MP3 songs will decrease.

B. quantity demanded for MP3 songs will decreases.

C. supply for MP3 songs will increase.

D. quantity supply for MP3 songs will decrease.



Blooms: Understand




2-50


45. Say at the current price there is an excess supply in the market for bicycles. In the future the

price for bicycles will:

A. increase.

B. decrease.

C. stay the same.

D. increase or decrease; but really can't tell.



Blooms: Understand



satisfied.


46. Say the market for cereal is initially in equilibrium when all the major newspaper published the

findings from study that say that eating 2 cups of cereal each day significantly reduces the risk

for a heart attack. Other things equal, the publication of these findings will:

A. decrease the market quantity of cereal.

B. decrease the market price of cereal.

C. increase the supply of cereal.

D. increase the quantity supplied of cereal.

AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard



2-51


47. Suppose the government imposed a binding price ceiling in the market for housing. Other

things equal, the effect of this price ceiling will be to:

A. decrease the quantity of houses for sale in the market.

B. give an incentive for buyers and sellers to of houses to make illegal transactions.

C. allow fewer low-income people to buy water.

D. all of the choices are correct.



Blooms: Understand





48. Suppose the demand for cigarettes was P = 100 - 5Q, and the supply for cigarettes was P = 5Q.

The market equilibrium price in this market would be:

A. $10

B. $20

C. $100

D. $5



Blooms: Understand



form.


2-52


49. If climate change were to reduce the output per acre of wheat but not the output of other

crops, what effect this would have on the soybean market?

A. The demand for soybeans would shift right and the price and quantity would rise.

B. The quantity demanded of soybeans will rise and price will increase.

C. The supply of soybeans will shift left and price will rise.

D. The quantity demanded will increase and the demand will shift right.



Blooms: Understand




50. Estate sales often involve an auctioneer rattling off prices in an effort to get the highest price

possible. Which of the following is true?

A. Because there is no chance to have the quantity supply increased in the moment the sale

cannot reach the efficient point.

B. The sale does reach equilibrium because the only person desiring the item at the last price

called gets it so no other trades could add to welfare.

C. If the auctioneer starts the bid too low and only one person wants the item, then efficiency

is not reached.

D. Equilibrium properties are not relevant unless a larger market is involved.



Blooms: Understand





2-53


51. A tax of 10 units on the seller can be shown graphically as a

A. leftward shift of demand.

B. leftward shift of supply.

C. rightward shift of supply.

D. rightward shift of demand.



Blooms: Understand



Topic: Appendix: How Do Taxes Affect Equilibrium Prices and Quantities

52. If a 20 unit tax is placed on a seller, then

A. the seller will bear all of the tax burden.

B. the buyer will bear all of the tax burden.

C. both parties will share the tax burden equally.

D. the distribution of the tax burden cannot be determined from the information given.



Blooms: Understand





2-54


53. If the government wishes to raise revenue by taxing cigarettes, it

A. makes no difference whether the consumer or the producer actually transfers the money to

the government since the market effects are the same.

B. is best to have the consumers pay the tax since they view cigarettes as necessities.

C. is best to tax the producer since they will not cut production just because of the tax.

D. is foolish since a sales tax increase leads to less tax revenue in an industry like tobacco.



Blooms: Understand




54. Let supply be given by P = 5Q and demand by P = 19 - 2Q. Suppose we now place a tax of 5

per unit of output on the seller. The new supply curve is:

A. P = 5Q

B. P = 5 + 5Q

C. P = 5Q - 5

D. P = 5Qt5

AACSB: Analytic


Blooms: Apply

Difficulty: 3 Hard


form.


2-55



per unit of output on the seller. The new equilibrium quantity is:

A. 7

B. 2

C. 3

D. 5

AACSB: Analytic


Blooms: Apply



form.



per unit of output on the seller. The new equilibrium price is:

A. 2

B. 7

C. 15

D. 10

AACSB: Analytic


Blooms: Apply



form.


2-56


57. As the supply curve becomes steeper, the proportion of a sales tax paid by the seller

A. increases.

B. decreases.

C. stays the same.




Blooms: Understand




58. As the demand curve becomes steeper, the proportion of a sales tax paid by the seller

A. increases.

B. decreases.

C. stays the same.




Blooms: Understand




2-57


59. Suppose that the supply curve for a good is vertical. In this case we would expect

A. nothing to be sold so no tax is collected.

B. a tax placed on the buyer to be borne entirely by the seller.

C. a tax placed on the buyer to be borne entirely by the buyer.

D. the tax to be shared equally by both buyer and seller.



Blooms: Understand




60. Which is true?

A. A per unit tax levied on the producer in an industry with a horizontal supply curve will be all

paid by the producer.

B. A per unit tax levied in an industry with a horizontal demand curve will be all paid by the

producer.

C. A producer never pays all of a per unit tax no matter what the market conditions.

D. A seller never pays all of a per unit tax no matter what the market conditions.

AACSB: Analytic


Blooms: Analyze

Difficulty: 3 Hard



2-58


61. Let supply be given by Q = -7.5 + 0.5P and demand by Q = 10 - 0.2P. Suppose we now place a

tax of $7 per unit of output on the seller. The new equilibrium price will be:

A. 4

B. 30

C. 37

D. 10

AACSB: Analytic


Blooms: Apply

Difficulty: 3 Hard


form.


Essay Questions

62. Explain why an equilibrium point in a free market is considered to be the socially efficient point.

Sketch graph a situation where a government price ceiling below equilibrium leads to

inefficiency. Explain in words why the inefficiency exists and shade in on your graph the lost

benefit that creates the inefficiency.

At equilibrium all units for which benefit exceeded cost would be produced. Thus net benefit is

maximized. As shown in Figure 2.6 in the text, at the ceiling equilibrium, output is under-

produced so marginal benefits exceed the marginal cost.


2-59


Blooms: Understand





63. If the demand curve of a market is P = 14 - Q and the supply curve is P = 2 + 2Q, what is the

surplus created if a price support of 12 is imposed in the market?

The equilibrium price of 10 is now replaced with a price of 12. At 12 the quantity demanded will

be 2 and the quantity supplied will be 5 leaving a surplus of 3.

AACSB: Analytic

Blooms: Apply



form.


64. If the demand curve of a market is P = 14 - Q and the supply curve is P = 2 + 2Q, but a price

ceiling of 6 is imposed, what will the shortage be?

Quantity demanded will be 8 and the quantity supplied will be 2 so the shortage is 6.

AACSB: Analytic

Blooms: Apply



form.


2-60


65. Your text shows how price supports or ceilings lead to a loss of welfare. What impact on welfare

would a quota or quantity restriction have on welfare?

As figure 2.5 in the text shows, output levels below equilibrium mean that there are people

willing to buy at prices higher than what some are willing to sell so there is opportunity for gain

that is missed.


Blooms: Understand





66. Suppose the market for Mexican food in your neighborhood was in equilibrium.

a. Draw a diagram showing the demand and supply curve for Mexican food. Indicate the

market equilibrium quantity and price in this market.

b. Suppose the government imposed a binding price ceiling in this market, with the goal of

making Mexican food affordable to most residents. Add the price ceiling to your diagram, and

then identify the quantity demanded and quantity supply in this market with the price ceiling.

c. Would the government be able to make Mexican food affordable to most people with the

price ceiling? Explain your answer using the diagram you drew in part (b).

Figure 2.6 in the text illustrates this problem if Mexican food is substituted for housing. Because

less is supplied fewer people have the food.

AACSB: Analytic

Blooms: Analyze


2-61





67. What is the equilibrium quantity of a market with a demand curve P = 10 - Q and a supply

curve equal to P = 2 + 2Q and a tax imposed on the seller of $2 per unit? How does this tax

effect resource allocation? What might justify the allocation effect of the tax?

Quantity = 2 because 10 - Q = 4 + 2Q, or 3Q = 6, so Q = 2. Before the tax the equilibrium was

2.67 units of output. Thus the tax reduces output. If the producer was discharging pollution

equal to $2 per unit of output, then the optimal output would be 2 and the tax would be

pushing the allocation process toward efficiency rather than away from efficiency.

AACSB: Analytic

Blooms: Apply



form.


chapter 02 supply and demand · mcgraw-hill education

Documents